10 Apr 2011 | Small Business
By now most Australian’s are aware of the impact an aging population will have on our economy. What is not as well understood is the impact that aging will have on Australia’s small business owners and their continued financial independence in retirement.
The findings of surveys conducted in 2005 and 2006, called the “Characteristics of Small Business” surveys, highlighted the increasing number of small business owners that are over 50. They estimated that in June 2006 33 per cent of all small business operators were aged greater than 50, and 58 per cent were aged between 30 and 50.
Successive Federal governments have recognised that the majority of a small business owner’s wealth is tied up in their business. The generous capital gains tax concessions available an indication of this. Small business owners that qualify for the concessions effectively have only 25 per cent of the profit they make on the sale of the business counted for capital gains tax. Where the gain is used for retirement no tax is payable up to a maximum lifetime limit of $500,000.
What too many small business owners fail to do is prepare for the time when they will be retiring. This can often lead to the value of the business not being maximised if it can be sold, or alternative wealth creation measures not being taken early enough when there is no business to sell.
The fact that a person does not really have a business, but instead has a job, can be one of the hardest realities that an owner must come to grips with. If the activities of the business almost totally depend on the owner, and without them the business does not operate efficiently, the chances of having a saleable business are virtually nil.
In this situation the owner has three choices. The first is to develop systems or employ people that will mean the activities of the business are no longer dependant on them. The second is to ensure the business is profitable enough to fund contributions to superannuation and or build investments outside of superannuation. In this situation once the owner retires they effectively walk away from the business.
The third option is to bring the next generation into the business. This is more often done to provide a future for the children rather than just provide the cash to fund the parents retirement. This option can however be fraught with danger if the owner’s children have not been equipped with the training necessary to run a profitable business.
Where it has been decided to develop a business that can be sold a critical part of this process is to compare the business with others in the same industry. Once an owner understands how their business compares with others, steps can be taken to make improvements. In the end the job of the owner is to make their business an attractive proposition for a potential buyer.
It is at this point an owner can realise that many years of trying to beat the taxman, by either hiding income or maximising deductible expenses, was not such a good idea. As long as this realisation is made early enough, so that as many years as possible of profitable trading can be demonstrated to a prospective purchaser, it is not too late.
If tax problems result they can be solved by maximising superannuation contributions. In addition the owner does not have to act like a dodgy used car salesman, by asking a potential buyer of the business to trust them, when the business records do not match the promised return.